Stratasys (SSYS -4.16%) reported fourth-quarter and full-year 2014 earnings results before the market opened on Monday. The headline numbers were anticlimactic. That's because on Feb. 2 the leading 3D printing company preannounced preliminary 2014 results that fell short of analysts' expectations and its own guidance and issued guidance for 2015 revenue and earnings that came in below analysts' estimates.
Briefly, MakerBot was responsible for throwing a wrench into what would have otherwise been solid results in the fourth quarter. The desktop 3D-printer maker posted weak year-over-year revenue growth of 7%, and Stratasys took a $102 million goodwill impairment charge for the unit.
Our purpose here is to supplement the earnings release information with color from Stratasys' conference call. Here are five key things you should know about.
Source: Stratasys.
MakerBot's tepid revenue growth in Q4 was mainly due to quality issues
From CEO David Reis' response to an analyst's question:
So the decline in the rate of growth we saw [for MakerBot] in Q4 was mainly because of quality issues, the warranty issues that we faced. This was the vast majority of the impact. [As to the] issue of the shift in the distribution [method], some of the distribution processes affected mainly reorder points.
Granted, companies aren't going to emphasize the negative, but the prepared opening remarks could have been more straightforward. One could get the idea that the shift in distribution methods -- just a temporary factor, so not nearly as concerning as a product quality issue -- was a strong reason for MakerBot's weak year-over-year revenue growth of 7%.
That said, MakerBot has traditionally been a well-regarded brand, and Stratasys should be able to successfully put the quality issues related to the extruders behind it.
Expect MakerBot to be a drag on results in 2015
From Reis' prepared remarks:
As we develop the business, we expect MakerBot's growth path will experience some inconsistencies and expect the first half of 2015 would be challenging. However, as we address these issues, we expect MakerBot's growth rate to ramp up to or ... [exceed] ... overall Company averages by 2016.
Investors should tuck this one away, so as to not be taken off guard when MakerBot negatively affects results for the first half of 2015.
Excluding MakerBot, the gross margin drop was not due to decreasing average selling prices
From CFO Erez Simha's prepared remarks (emphasis mine):
Gross margin was 56% for the fourth quarter, compared to 60.2% for the same period last year. Gross margin relative to last year was mainly affected by the charges and reserves relating to the introduction and scaling of [the] new MakerBot product platform ... as well as by lower gross margin generated by the incremental revenue recognized from [the] acquisitions of Solid Concept and Harvest Technologies.
Excluding the impact of acquisitions and these incremental charges, fourth quarter gross margin would have been relatively flat year over year.
Compared to the third quarter of 2014 [which had a gross margin of 58.4%], the decline in gross margin was driven by the MakerBot charges and reserves as well as a shift in product mix; specifically the third quarter of 2014 experienced relatively stronger sales of Objet1000 following the product initial launch.
As mentioned in my earnings preview and earnings recap, the company's gross margin is an especially key metric. Simha's quote explains why the gross margin in Q4 dropped from both a year-over-year basis and sequentially from Q3. The good news is that – excluding MakerBot -- it doesn't appear to be due to a decrease in product average selling prices. In fact, later in the call, Reis explicitly stated such.
Hints of new innovative platforms on the horizon
From Reis' prepared remarks:
Looking longer term, we have multiple innovation products that have the potential to produce new platforms that could greatly expand the adoption of existing application as well as open up new markets. These additional investments are, by definition, long-term investments with at least two- to four-year time horizon expected for product launch.
Reis is talking about new 3D printing platforms here, not just incremental improvements to existing ones. Various intriguing possibilities come to mind. For one, Stratasys could introduce a platform capable of producing items considerably larger than its current platforms can. As I recently wrote about, several patent applications published in 2014 suggest the company is working on such a platform.
Another possibility is that Stratasys could be working on developing a considerably faster platform. This would be especially welcome news, as speed is widely considered one of the main factors holding 3D printing back from making increased inroads into manufacturing applications. Additionally, Stratasys will surely eventually need such a platform if it wants to maintain its leadership position in the enterprise-focused 3D printing space. That's because archrival 3D Systems has been developing a high-speed, continuous platform that it has teased will be 50 times faster than comparable printers on the market. Additionally, Hewlett-Packard announced its plans last fall to bring to market an enterprise 3D printer in 2016. HP claims its 3D printer, based on its new "Multi Jet Fusion" technology, is 10 times faster than those powered by the leading extrusion-based and selective laser sintering 3D printing technologies.
Final thoughts
MakerBot's weaker-than-expected revenue and the goodwill impairment charge Stratasys took for this unit in the fourth quarter were surely disappointing. That said, MakerBot accounts for a relatively small percentage of Stratasys' total revenue -- about 12% in the fourth quarter -- and there's currently no indication that the company's core enterprise-focused business is not performing well.
